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The recent GameStop Stock Short Squeeze Story is continuing to have an effect on the Markets primarily because of the power of Social media and the ability of many new Stock Traders getting involved in Stock Trading because of the news about GameStop. The use of Trading Apps empowering millions of small investors and traders with the apparent ability to move Markets with their Trading activities has now come of age. There is nothing new about Stock Short Squeezes, experienced Investors have been using the Strategy for years.
The real story however is that those who embark on this journey without proper training and experience will eventually get hurt, and experienced well trained Investors and Traders will learn how to take advantage of them and their undisciplined Stock Trading activity. A little knowledge, as it is often said, can be dangerous. It has long been known that there is a lot of "Dumb Money" in the Markets as opposed to the "Smart Money".
The Smart Money always wins and eventually benefits from the presence of the Dumb Money in the Markets. In fact most of the Investors and Traders in the Markets are in the Dumb Money category, until they get the training and experience needed to truly be competitive against the highly experienced Smart Money crowd. Investing and Trading is really a business and should be conducted like a business to be ultimately successful, considering the enormous amount of competition in the Securities Marketplace. This was one of the primary reasons Investment Groups like The Hannaian Investment & Publishing Group (HIPG) was established back in the mid 1990's. HIPG wanted to ensure that its Membership was provided the proper training for their Research, Publishing, and Investment activities, so that they would become "Smart Money" Investors and Traders.
We are Reprinting an Article we think has excellent educational value for potential Investors and Traders.
The original Article can be viewed in its original publication at: https://finance.yahoo.com/news/buy-stock-heres-much-cash-180211114.html
When you buy $1,000 of a company’s stock in your Robinhood account, how much of that cash goes directly to help fund the company and its business operations? The answer is $0.
Where Your Cash Goes: The issue of buying shares of stock to help “save” struggling companies like GameStop Corp. (NYSE: GME) and AMC Entertainment Holdings Inc (NYSE: AMC) has come up frequently on social media since the WallStreetBets-fueled meme stock buying frenzy began in January. However, experienced investors know that publicly traded companies don’t get a dime from the cash you spend buying their shares of stock.
Companies typically raise cash in the public market when they first go public via an initial public offering (IPO), a merger with a special acquisition company (SPAC) or a direct listing. However, once their shares are trading on the public market, any shares you buy in your brokerage account are coming directly from another shareholder who is selling, not the company itself. Aside from any trading fees you may spend on the transaction, every dollar you spend buying shares of GameStop, AMC or other stocks ends up in the brokerage account of the person or institution that sold them to you.
AMC and GameStop traders on Reddit and Twitter have been celebrating their efforts to “save” these companies by buying shares of stock. In reality, the companies haven’t gotten any funds from any of the recent stock buying.
How Public Companies Raise Funds: Once a company is public, it must raise capital via options such as a follow-on public offer (FPO), also known as a secondary offering. FPOs can be both dilutive or non-dilutive. A non-dilutive FPO happens when the founders or other large shareholders sell some of their shares to the public. An FPO may increase a stock’s float, or free-trading shares, but it does not increase the company’s outstanding shares or decrease its EPS.
A dilutive FPO happens when a company creates new shares to sell to the public. By creating new shares, the ownership stakes of existing shareholders are decreased slightly the same way the value of a currency erodes when central banks print more money.
Companies can also raise capital by borrowing money. However, the company must first find a lender that will agree on a reasonable interest rate. Many lenders don’t want to touch struggling companies like AMC and GameStop because they aren’t convinced they will be able to pay back their debts.
What It Means For Meme Stocks: Despite all the publicity and wild volatility in GameStop, the company itself hasn’t actually been directly helped by all the retail buying. GameStop reportedly considered selling more shares during the January rally, but the SEC has said it would closely scrutinize any company that attempted to take advantage of the extreme trading volatility to knowingly sell overpriced shares to vulnerable investors. In June 2020, bankrupt Hertz Global Holdings Inc (OTC: HTZGQ) withdrew a proposed $500 million equity offering after the SEC cracked down on the company for potentially preying on investors.
AMC, on the other hand, was able to raise $1.2 billion via debt and equity deals in January after its stock rallied more than 700%.
“The irony here, of course, is that GME couldn’t even tap equity markets to take advantage of the recent short squeeze,” DataTrek Research co-founder Nicholas Colas said this week.
He said the so-called “dumb money” flowing into the market may not be helping the companies directly, but it is certainly making short sellers think twice.
“You don’t have to be long, but betting against people who think their 10-share buy order is going to change the world is both risky and not actually a fundamentally-based investment position,” Colas said.
The National Market Report (NMR), is hosted by Intellectual Property and Securities Attorney Harlington L. Hanna Jr., founder of the Law Firm Hannaian Law Associates (http://hannaianlaw.com. He is...
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